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Using Value of IRA as Collateral for Venture Has Pros and Cons

September 27, 2000|KAREN E. KLEIN | SPECIAL TO THE TIMES

Q. In addition to my liquid savings, I have about $50,000 invested in various IRAs and Roth IRAs. Can I use the value of these investments (about $30,000 after taxes and penalties) as collateral for a bank loan to fund a new business venture? Or should I simply withdraw the funds and thus incur the penalties and lose the tax-advantaged savings?

--John Ackermann, Manhattan Beach

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A. This is a complex situation that you should take up with your accountant and/or income tax preparer. However, if your bank is willing to use the retirement funds as collateral, it would certainly keep your tax liability down to do so because the funds would not have to be pulled out of the accounts and included in income. However, if you have other assets available, such as real estate, it would be better to use them as loan collateral.

In some cases, however, it might make sense to pull the money out of your retirement accounts and recognize the income. For instance, if you have a business venture that is distributing losses that can be used by you (as the owner) individually (if the entity you're creating is an S corporation, a partnership, a limited liability company, or a sole proprietorship), then the income generated by pulling the funds out might be sheltered by the losses of the business. When you withdraw funds early from a retirement account, you have to pay the Section 72 "penalty tax" of 10% for federal, 2.5% for California.

For the Record
Los Angeles Times Thursday September 28, 2000 Home Edition Business Part C Page 3 Financial Desk 2 inches; 59 words Type of Material: Correction
IRA advice--The "Small Talk" column Wednesday gave incorrect advice about IRA accounts. IRAs may not be used as security for a loan. According to federal tax law, if you use all or part of an individual retirement account as loan collateral, it would be treated as a distribution and would generally be included in your gross income. "Penalty taxes" of 10% federal and 2.5% state may also be levied on premature distributions.
For the Record
Los Angeles Times Wednesday October 4, 2000 Home Edition Business Part C Page 7 Financial Desk 2 inches; 59 words Type of Material: Correction
IRA Advice--The Small Talk column last Wednesday gave incorrect advice about IRA accounts. IRAs may not be used as security for a loan. According to federal tax law, if you use all or part of an individual retirement account as loan collateral, it will be treated as a distribution and will generally be included in your gross income. Penalty taxes of 10% federal and 2.5% state may also be levied on premature distributions.

--David R. Flamer, CPA, Woodland Hills

Making a Brand New Start

Q. I am starting a sportswear business online, marketing T-shirts, caps and jackets with a brand name and design that is associated with a once-every-four-year festival known to more than 200 million people in a region of the world. I have registered the URL and gotten a trademark on the name. What can I do to increase my chances of success, and how do I begin to raise money for this venture?

--Andrew Maduk, Los Angeles

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A. You say you have the rights to this property, but you must be absolutely sure you have the exclusive rights before you approach investors. The less risk your venture carries, the more receptive potential investors will be. Be prepared to show written documents that guarantee your claims to those rights and your pitch to investors will get over the first hurdle.

Second, you will need to show a reasonable estimate of your potential market and back it up with an explanation of how you got to that figure. If a low percentage of your potential market could make it a success, you're over hurdle No. 2.

Third, don't be conservative. The two code words for disaster I always look for are "conservative" and "potential." Investors will want to see you spending large amounts on marketing and advertising because they know that if the public doesn't know about your product, they are not going to buy it.

Many new business owners think they will impress investors with claims such as, "We're not going to waste your money on flashy ad campaigns." But if flash will get you customers, that's what counts. Decide how much money you'd need to make the business go, then triple it.

The one thing investors look for is experience, and only experience can teach you that it's what you didn't plan on that kills you. Allow for life to throw you its little curves and jokes.

If you're dealing with a licensed property, save yourself months of agonizing labor and hook up with the master licenser. Especially in licensing, it's to everyone's benefit to have the license do well, so look at other licensees as allies, not competition, and communicate with them. This is especially easy to do online, via e-mail.

Give yourself enough time to pull this venture off. You're too late for anything to happen this year, but you're fine for spring 2001 or later. If your business is strictly online, build a site that's easy to use and goes beyond the scope of sales. When dealing with licensed products, there's usually a culture associated with the license. Exploit that interest and invite your Web visitors to enjoy other aspects of that culture as an adjunct to your business. You'll find they prefer doing business with a "guy who gets it" over "a guy who's just out to sell widgets."

--Rob Frankel, branding expert and author, "The Revenge of Brand X," http://www.robfrankel.com

Aids for Hearing-Impaired

Q. I am a hearing-impaired entrepreneur who operates a mobile testing laboratory equipped with computer, fax, copier and telephone. Talking on the phone inside the vehicle results in a lot of interference and feedback in my hearing aids. Is there a new technology--software or speakerphone--that would help?

--Jaime I. Magalong, Sanger, Calif.

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A HAC--Hearing Aid Centers of America Inc. might offer a solution for you or be able to point you in the right direction. The Kalamazoo, Mich.-based company offers amplification products for telephone listening and other aids for the hearing-impaired on its Web site at http://www.hacofamerica.com. It also may be reached by voice or TTY at (800) 445-9968.

--Jim Kelton, Software

Unlimited, Irvine

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Send letters to Karen E. Klein, Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016, or e-mail it to kklein6349@aol.com. Include your name, address and telephone number. This column is designed to answer questions of general interest. It should not be construed as legal advice.

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